AIG American International Group Inc

By Leslie Scism 

Life-insurance stocks fell sharply again Thursday as worries mount about the pain of plunging oil prices and the possibility that low interest rates won't go away as fast as expected.

Prudential Financial Inc. was among the hardest hit, down more than 10% a day after it reported disappointing fourth-quarter earnings. Operating earnings declined 12% and the Newark, N.J.-based company missed Wall Street expectations because of weak investment income and higher expenses.

Shares of Lincoln National Corp., another life insurer, fell more than 9% in early afternoon trading. MetLife Inc. was down nearly 5%.

Rising rates are good for Prudential and other large insurers because they tend to invest the premiums paid by individuals and businesses in high-quality corporate bonds as a way of generating income until claims come due.

The fear among insurance investors is that the Federal Reserve won't follow through on its desire to gradually raise interest rates this year because of concerns about global economic growth. That means the pressure on insurers' investment income could remain--potentially for years.

The latest declines leave Prudential down 21% through Wednesday's close, worse than the 9.4% decline in the S&P 500 through the same period. Lincoln National Corp. was down 31.8% through Wednesday, MetLife Inc. was down 23.5% and American International Group Inc. was down 15.4%.

Interest rates aren't the only factor driving shares lower. Insurers also are reeling from depressed oil prices and a troubled energy industry. Fitch Ratings estimates that U.S. life insurers face $3 billion to $4 billion of energy-related corporate bond losses in 2016, or about 5% of industry statutory earnings and 1% of statutory capital.

"While U.S. life insurers are relatively well-positioned to ride out the oil slump, in a 'lower for longer' oil price scenario, insurers may be more susceptible to ratings downgrades if energy contagion spills into other asset classes," said Doug Meyer, a managing director at Fitch.

Another problem is that many insurers over the last decade have increased their reliance on retirement-income savings products that are tied to market performance. These products, known as variable annuities, are a tax-advantaged way for consumers to invest in stock funds. Insurers earn fees based on the invested amounts, so in a down market they earn less, as with the mutual funds some sell in their asset-management units.

Variable annuities also typically are sold with lifetime-income guarantees, and those guarantees are costlier for life insurers to provide when interest rates are low.

The release of Prudential's earnings Wednesday prompted some Wall Street analysts to reduce their expectations for the insurer in 2016. Morgan Stanley knocked 40 cents off its 2016 earnings-per-share estimate, to $9.70, because of "current market conditions," it said.

Prudential's weak results followed a disappointing fourth-quarter earnings report last week by MetLife, the nation's biggest life insurer by assets. MetLife became the latest insurer to cite faltering performance of private-equity and hedge funds as a factor in its earnings, which were below Wall Street expectations as the company reported weaker profit margins in many of its core operations.

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

February 11, 2016 13:31 ET (18:31 GMT)

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